Constellation Brands Should Remain A Core Holding

RBC Capital Markets analysts believe Constellation Brands, Inc. STZ should remain as a core holding. The brokerage retained its Outperform rating, as well as the price target of $181.

The analysts viewed that with Constellation Brands shares up nearly 8-fold in the past five years, they could understand the investors' concern that the stock's run was over. RBC Capital Markets does not expect STZ shares to generate the types of returns that it delivered in the past five years.

Therefore, the analysts think, "We still believe the company can deliver alpha relative to the overall consumer staples sector (we see low to mid-teens annual returns over the next 3 years). We believe STZ should continue to be a core holding and believe pull-backs should be bought."

One of the key points pointed out by the brokerage is the underlying beer fundamentals that is intact though lower than going in estimations. The analysts believe Constellation performed at an elevated level for several years in the beer business.

The brokerage believes the significant change is the appointment of Bill Newlands to head up the wine/spirits division. "We believe Mr. Newlands is already having a positive impact on sales trends. We forecast 8% sales growth for the Wine/ Spirits division this quarter, with a good balance of volume and price/mix. We also expect margins to expand by over 100 bps," the analyst wrote in a note.